Disclosure is taking a higher profile at Lennar, Inc., one of the nation’s most prominent homebuilders. Analysis of LEN’s recent 8K supplemental SEC filing reveals much more about the company’s financial condition than was often the case in the past.
Los Angeles, CA, April 17, 2009 — Disclosure is taking a higher profile at Lennar, Inc. (NYSE:LEN), one of the nation’s most prominent homebuilders. An analysis of LEN’s recent 8K supplemental SEC filing dated March 31, 2009 reveals much more about the company’s financial condition than was often the case in the past.
Disclosing more, hiding less?
According to Chris McConnell AIFA, of Chris McConnell & Associates / FiduciaryFORENSICS®, an LA-based fiduciary forensics consultancy ( http://fiduciaryforensics.blogspot.com/ ), kudos are due LEN’s board and management in issuing the 8K, for listening to its critics and recognizing that it alone controls and decides whether to increase the flow of information needed to respond to analysts’ and investors’ concerns.
Lennar has decided to be proactive in an attempt to disclose more and hide less. Seemingly detailed disclosures appeared in the 8K, a 20-page PowerPoint-like document, packed with new Joint Venture information, but there may be a bit less here than meets the eye.
Clues and cues
Markets look for the presence, absence and change in signals from management, especially in a leadership vacuum. Within its theater of operations, management must recognize and assume total command of at least two elements of investor communication: 1) Information that positively stimulates a stock price, e.g., promising new developments, new sales, and other indications the company is performing well, and 2) The opposite, more controllable and vastly more important: removing or addressing concerns, obstacles, hurdles and impediments to enhance investors’ collective comfort level and understanding of the company.
A brief analysis of LEN’s recent 8K disclosures ( http://sn.im/lennar-prepares-8k-spread ) includes a sea of details but many unanswered concerns regarding the potential for off balance sheet debt to inundate a shrinking balance sheet. Tables in the document show LEN’s management took early proactive measures to protect its balance sheet and shareholders; LEN provided disclosure of the accounting treatment, sample loan language and code of conduct with its JVs, and mentioned that LEN’s internal audit unit monitors its compliance with fiduciary duties. The JV tables show 7 of the top 10 are “land” deals, 6 of 10 are located in Southern California, 7 of 10 are 2004/5 vintage deals, yet only 4 of 10 reveal recourse debt data, and the source of near 70% of LEN’s $474 Million in exposure to potential recourse debt is still hidden.
Investors are still waiting to asses issues for both on and off balance sheet items such as the nature, timing, consistency, extent and method of valuation adjustments, if any; the present and future compared to the past.
LEN’s share price reflects some additional investors’ concerns
LEN recent share price as of April 9, 2009 of $8.18 is only slightly above cash per share of $6.80; LEN is second from bottom in an eight-company* industry survey where the average share price is 145% of cash per share. LEN’s share price reflects a 50% discount to book value of $16.34, and ranks lowest in the industry by a wide margin.
At these seemingly opportunity-driven levels, aside from three directors’ and one officer’s minor purchases, LEN’s other insiders have shown a decided reluctance to buy their own stock.
Smoke signals from the Pulte/Centex deal?
Pulte Homes (NYSE:PHM) recent proposed takeover of Centex (NYSE:CTX) is valued at $1.3B, yet Centex has $1.4B in cash on the books. This sends another curve to investors.
LEN was an innovator in the off balance sheet joint venture “Land Bank”
As LEN was among the first to recognize and effectively implement industry-leading benefits from the “land bank” concept, it became a significant differentiated driver of LEN’s profits, though with some hedge fund-like characteristics, starting with a shield from competitors’, regulators’ and investors’ eyes, custom-engineered risk, reward and exposure, proprietary valuations and leveraged.
A modest proposal: Show investors the bronze, silver and gold linings
Some analysts suggest that a more reasonable response might include listing the top ten recourse debt exposure deals with names redacted. “LEN has an exceptional opportunity to command the lead in the industry and indeed set the standard for public companies’ disclosure, consistent with its home selling tag line: “Everything’s Included,” says McConnell. “It can become the brightest beacon of light in the industry by offering total disclosure of its off balance sheet operations during an unprecedented, historic meltdown in the industry and economy. Investors are clearly yearning for more decisive, tough, transparent decisions at the helm of our leading corporations.”
Here’s how it looks to Chris McConnell: “LEN has responded with welcome and improved disclosures, but has not yet quenched investors thirst for more.” McConnell suggests that this is something that applies not just to LEN but to all public companies. The questions that need to be addressed are these: “What can management and boards do and what are the tools and ways they can use to help investors become more informed and comfortable about the great, good and not so good or less well understood aspects of the company’s stock?” For the ultimate benefit of all the constituencies, a new approach is needed. that LEN’s board and management serve, recognize and deliver a fiduciary duty to individual and institutional shareholders alike, LEN’s employees in their 401k plan, their joint venture partners, creditors and beneficiaries of family investments and related trusts and their regulators. LEN can set a high bar, new standard for disclosure that will help restore consumer and investor confidence. They can now begin to set an example.
To learn more see http://sn.im/lennar-prepares-8k-spread
Chris McConnell & Associates
CMA’s proprietary, trademarked service FiduciaryFORENSICS® is based upon 25 years and an unmatched combination of advanced AIFA® training, actual hands-on major Wall St. broker dealer experience and his Economics / Accounting expertise. CMA has provided fiduciary audit, training, and expert witness services to plaintiff and defense counsel regarding fiduciary duty, suitability, supervision and compensation matters in FINRA, Trust, Estate & Probate, Divorce, QDROs, ERISA, 401k; and non-profits, foundations and endowment matters since 2003.
* Eight company industry survey company components include DR Horton (NYSE:DHI), Toll Brothers (NYSE:TOL), Pulte Homes (NYSE:PHM), Centex (NYSE:CTX), Lennar (NYSE:LEN), KB Homes (NYSE:KBH), NVR Inc. (NYSE:NVR), MDC Holdings (NYSE:MDC).
The source of the financial statistics provided is Yahoo finance
4/9/2009
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